These Squiggly Lines Remind Us That Wall Street Analysts Are Terrible At Forecasting Earnings

As usual, investors should prepare for some volatility as
companies do their best to beat analysts' expectations.

It's worth noting, however, that those expectations tend to be
very inaccurate. Furthermore, analysts will revise their
forecasts dramatically as more information comes in.

In almost every quarter since the financial crisis, we've seen
estimates gradually reduced. Deutsche Bank's David
Bianco presents this chart of analysts' evolving quarterly
earnings expectations.

Deutsche Bank

"Given sharp cuts in analyst estimates this quarter, 2/3rds of
S&P companies should beat with an avg. EPS beat of 3% to 5%,"
speculated Bianco.

Counterintuitively,
stock prices have only been rising during these periods of
reduced earnings expectations. This can partially be explained by
the fact that most investors have actually expected estimates to
come down. Barclays'
recently asked its clients by how much and in what direction
they expected analysts to adjust their earnings estimates. As you
can see in the bar chart below, most were expecting negative
revisions.

Barclays

For some historical context, strategist
Gerard Minack published this chart a while back. It shows
evolving earnings expectations since 1986. As you can see, the
expectations are never static, and they're almost always way off
when they're first published.